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American Rescue Plan Act of 2021

American Rescue Plan Act of 2021

The House of Representatives & Senate have approved the $1.9 trillion COVID relief plan (American Rescue Plan Act of 2021). President Biden is expected to sign the legislation this week.

Key Provisions

  • An additional $300 billion in weekly jobless benefits through September 2021.
  • Rental assistance and Covid-19 vaccination funds. 
  • The first $10,200 in unemployment benefits will be non-taxable for households making under $150,000.
  • Direct payments of $1,400 to individuals, $350 billion in aid to state and local governments and $14 billion for vaccine distribution. 
  • Allocated $130 billion to elementary, middle and high schools to assist with safe reopening. 
  • Expanded tax credit of up to $3,600 per child, initially distributed in monthly installments. 
  • More than $50 billion will be distributed to small businesses, including $7 billion for the Paycheck Protection Program. 
  • Relief fund of $25 billion for small and mid-sized restaurants, which have suffered significantly during the pandemic. 
  • More generous ACA health insurance coverage subsidies although lowers the “subsidy cliff.”  The subsidy cliff currently ends health insurance premium subsidies for the households earning over 400 percent of the federal poverty line, while the American Rescue Plan would limit payment on health insurance through the end of 2022 at 8.5 percent of a household’s income. 
  • Exemption of student loan forgiveness from federal taxation through 2026
  • The plan also incorporated tax hikes on the wealthy and big corporations into the Coronavirus relief package.

Who is eligible for the third stimulus check?

Millions of Americans who were eligible for the second stimulus payments could qualify for the $1,400 checks. There were some changes and now high-earning taxpayers might not be eligible for the third stimulus payment. 

All dependents (no matter how old they are) can qualify for an additional $1,400 payment. For example, elderly relatives and college students aged 23 or younger can qualify for the check. 

Mixed status couples (where one spouse is a nonresident alien) are eligible for the third stimulus payment as well as were eligible for the second stimulus check retroactively. 

To learn more about the relief payments check out our guide on stimulus checks and what’s changed from last year.

Rental assistance

The plan allocates $25 billion for emergency rental assistance, including $5 billion for emergency housing vouchers for people experiencing homelessness, survivors of domestic violence and victims of human trafficking.

Expansion of Child Tax Credit

The American Rescue Plan would temporarily expand the child tax credit for 2021. The plan would allow 17-year-old children to qualify (currently, credit stops in the year where a child turned 17). Further, it would increase the credit to $3,000 per child ($3,600 per child under age of six) for many families. Third, it would remove the $2,500 earnings floor. Any family with qualifying children will receive the credit, even if total family earnings are below $2,500. 

The IRS will estimate taxpayers' child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021. The taxpayer will reconcile the advance payment amount with the actual credit amount on next year's return and increase taxable income by the excess of the advance payment amount over the actual credit allowed. 

The income increase due to an excess advance payment will get reduced by $2,000 per child for taxpayers with modified AGI not more than 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly). 

Lookback Provision

The temporary special rule will allow lower income individuals to use their 2019 earned income to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit for 2020 tax year. The taxpayer will choose, whichever year, 2019 or 2020, qualifies them for the higher amount of credit.

COBRA continuation coverage

The plan provides COBRA continuation coverage premium assistance for individuals who are eligible for the coverage between the date of enactment and Sept. 21, 2021. The COBRA continuation coverage premium assistance will be issued as a refundable credit and will not be included in the recipient's gross income.

Child and dependent care credit

The bill makes child and dependent care credit refundable for 2021. The bill also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Exemption of Student Loan Forgiveness

Any student loan forgiveness passed between December 1, 2020 and January 1st, 2026 will be tax free, rather than considered taxable income.

Family and sick leave credits

The credits for sick and family leave originally would be extended to Sept. 30, 2021.

The bill increases the limit on the credit for paid family leave to $12,000. The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.

The paid leave credits will be allowed for leave due to a COVID-19 vaccination, not only to actual COVID-19 disease of the taxpayer or the spouse.

Employee retention credits

The bill extends the employee retention credit through the end of 2021. The employee retention credit allows eligible employers to claim a credit for paying qualified wages to employees.

Filing 2020 tax returns

After the bill became a law, it will take some time for the IRS to update the tax forms to reflect the new provisions. It is recommended to hold off the filing until the anticipated credits are enabled.

Ines Zemelman, EA
Founder of TFX